definition of welfare
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DEFINITIONS OF WELFARE
(This handout is largely based on the ideas of Amartya Sen)
UTILITARIAN OR UTILITY DEFINITION OF WELFARE
Utilitarianism defines welfare in terms ofutility. Utility means pleasure or
Happiness. The welfare of a person A is said to be higher than the welfare
of a person B if the utility of A is greater than the utility of B
Ua > Ub = Wa > Wb
Where Ua is the utility of person A
Ub is the utility of person B
Wa is welfare of person A
Wb is welfare of person B
Bentham is considered as the founder of utilitarianism. According to
Bentham the goal of economic policy is the greatest happiness of the
greatest number. This means that economic policy should maximize the
sum of the utilities of all the people in the society. Policy should maximize
( U1 + U2 + U3 --- + Un), where U1 --- Un are the utilities of the people
in the society. Suppose P1 and P2 are two economic policies. The policies
produce the following total utility:
P1 : ( U1 + U2 + U3 --- + Un) = 1000
P2: ( U1 + U2 + U3 --- + Un) = 2000
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P2 results in higher total utility than P1. Therefore policy P2 is preferred to
P1.
PROPERTIES OF UTILITARIAN DEFINITION OF WELFARE:
Sen classifies the properties of the utility definition of welfare as follows :
1) Cardinal utility
2) Comparable utilities
3) Consequentialism
4) Neutrality
5) Anonymity
1) Cardinal utility: it is assumed that utility can be cardinally
measured. That is, it is assumed that we can either measure the
difference between utilities or the actual utility values.
2) Comparable utilities : It is assumed that interpersonal
comparisons of utility( can )
can be made. This means that the utility of one person can be
compared with the utility of another person.
3) Consequentialism : A policy or action should be judged by its
consequences or results. (
).
) A good policy/action is one which results in higher utility. A
policy/action is bad if it results in lower utility. For example, an
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action which causes pollution is bad only if it results in lesser utility.
No policy or action is good or bad by itself
4) Neutrality : only utility information ( )
is taken into account. That is, the welfare of a person or a social
state is defined only with reference to the utility levels.
5) Anonymity : The identity of individuals is not taken into
consideration. Only the total utility level is assumed important.
Social welfare ( ) is assumed to remain same
if the utility values are interchanged between people, since the
individual identity is not important. For example assume policies
P1 and P2 have the following results for two people A and B :
P1 : Ua = 100, Ub = 200. Ua + Ub = 100 +
200 = 300
P2: Ua = 200, Ub = 100. Ua + Ub = 200 +
100 = 300
Utility values are interchanged (
) but the total utility is same and therefore P1 and P2 are assumed to
result in same welfare levels. Whether A gets more utility or B gets
more utility is not important.
CRITICAL EVALUATION OF UTILITY DEFINITION
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MERITS OF UTILITY DEFINITION
The following are the merits of the utility definition of welfare:
1) Sen says that a good definition of welfare should define welfare in
terms of an object which is the goal or an end in itself. It should not
be the means to some other goal (
).
For most people happiness is a goal in itself. Since the utility definition
defines welfare in terms of an object ( happiness) which is a goal in
itself, it is a good definition of welfare.
2) Utility definition uses more information than the preference
definition of welfare ( the most widely accepted definition):
a) The preference definition uses only ordinal measure i.e., only
ranking information. Utility definition uses cardinal measure
which provides more information than ordinal measure.
b) The utility definition allows for interpersonal comparisons of
utility. This information is required for evaluation of
economic policies. Preference definition does not use this
information.
c) The preference definition uses only the information obtained
from observed behaviour of a consumer. It neglects the
mental state of a consumer which cannot be observed. (
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). Utility definition uses the information about the mental state of
a consumer also.
3) Some economists say that the utility definition supports equal
distribution of income. The marginal utility from money for a rich
person is lower than marginal utility from money for a poor person.
Therefore a policy which increases the income of the poor
maximizes total utility. The redistribution of income from the rich
to the poor also maximizes total utility.
LIMITATIONS OF THE UTILITY DEFINITION
1) The utility definition ignores non-utility information (
). Any information about a social state other than the utility levels is not
taken into account. For example the definition ignores information
about freedom or the literacy levels, because this is non-utility
information. The non-utility information is often very important
component of welfare. A society may have high total utility but very
less freedom. It is not correct to say that the welfare is high in this
society.
2) Sen says that since non-utility information is ignored, the utility
definition leads to physical condition neglect(
). For example, a person with high utility can be handicapped (
) and not able to work. But the physical handicap is ignored by utility
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definition. Due to physical condition neglect, a handicapped person
with high utility is assumed to have higher welfare than a healthy
person with low utility.
3) According to Sen, the level of utility can depend on the culture of
people. So in a culture where women are taught to accept physical
condition neglect, their utility will be high even when they have poor
health and less freedom than men. Therefore the utility definition
ignores the harmful effects of cultural traditions, especially on the
welfare of women.
4) Since utilitarianism is concerned with total utility, the distribution
of utility is neglected. For example consider the following policies:
P1 : Ua + Ub = 100 + 100 = 200
P2: Ua + Ub = 0 + 200 = 200
Both policies are considered to result in same welfare levels although in
P2 person A gets zero utility. The unequal distribution in P2 is ignored
by utility definition.
4) Since distribution is neglected, utilitarianism can be used to
support unequal distribution of income. A policy P1 is considered
better than P2 even if P1 makes the rich richer and the poor poorer.
Example: A is rich person and B is poor person.
P1 : Ua + Ub = 400 + 100 = 500
P2 : Ua + Ub = 900 + 50 = 950
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In P2 the rich person A is made richer and poor person B is made
poorer. But P2 is considered best policy. Therefore utilitarianism
supports unequal income distribution.
PREFERENCE DEFINITION OF WELFARE
The preference definition of welfare is the most widely accepted
definition. According to the preference definition, the preferences of
an individual indicate her welfare. If a consumer A prefers good x to
good y, we can say that her welfare is higher in consuming x.
According to the preference definition:
xPy = Wx > Wy
yPx = Wy > Wx
xIy = Wx = Wy
Where xPy means x is preferred to y
yPx means y is preferred to x
xIy means the consumer is indifferent ( ) between
x and y
Wx is welfare from consuming x
Wy is welfare from consuming y
The preference of an individual can be indicated either by the money
she is willing to pay for a good or by her vote in the case of elections.
PEROPERTIES OF PREFERENCE DEFINITION
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Sen classifies the properties of the preference definition of welfare as
follows:
1) Ordinal utility
2) Non-Comparable utilities
3) Behaviourism
4) Neutrality
5) Anonymity
6) Self-interest motivation.
1) Ordinal utility: The preference definition of welfare assumes that
utility can be measured ordinally and not cardinally. That is, it is
assumed that we can rank welfare levels of individuals but no other
information can be obtained. For example, we can determine that
Wx > Wy but we cannot measure the difference between Wx and
Wy or the actual welfare levels.
2 ) Non-comparable utilities ( ) : It is assumed that
interpersonal comparisons of utility cannot be made. For example assume
that consumer A prefers x to y and consumer B prefers y to x. We can say
that A gets more welfare from x and B gets more welfare from y. But we
cannot compare the welfare of A and B.
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3) Behaviourism ( ) : The preference definition
assumes that the only information available about consumers is the
behaviour that can be observed in the market. The mental state of a
consumer cannot be observed and therefore is not taken into consideration.
4) Neutrality : only utility information orinformation about
preferences( ) is taken into account. ( The word
utility means preference in the preference definition) That is, the
welfare of a person or a social state is defined only with reference to the
preferences of individuals.
5) Anonymity ( ) : The identity of individuals is not
taken into consideration. Only the preferences are taken into account.
Social welfare is assumed to remain same if the preferences are
interchanged between people, since the individual identity is not
important. Whether A prefers x or B prefers x is not given any
importance. For example let consumers A, B and C have the following
preference orderings in two social states:
Social State 1 :
A : xPy
B : xPy
C : yPx
Social state 2:
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A : yPx
B : xPy
C : xPy
In both social states majority preference is for x , so x is the social
preference ( ). The preferences of A and C are
interchanged ( ). But the social preference
remains the same. This is because the individuals are not important.
6) Self - interest motivation ( ) : It is assumed
that individuals are always motivated by self-interest. Each person is
concerned only about her own welfare and not the welfare of others. Is
a person prefers x to y it is because it promotes her self-interest.
CRITICAL EVALUATION OF PREFERENCE DEFINITION
MERITS OF PREFERENCE DEFINITION:
The following are the merits of the preference definition of welfare:
1) The preference definition requires minimum information. The
only information required is the observed preferences of a consumer.
It is easy to obtain this information. Samuelson says that the
preference definition and the utilitarian definition provide the same
knowledge about consumer behaviour but the preference definition
is easier to use.
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2) The preference definition is the basis of the pareto criterion
which is the most widely used approach to define efficient allocation
of resources.
3) Much ofenvironmental economics is based on the preference
approach to welfare. The preference definition is very useful in
studying the cause of environmental problems as well as for valuing
environmental resources.
4) The most important tool of decision making namely Cost Benefit
Analysis is based on the preference definition of welfare.
LIMITATIONS OF THE PREFERENCE DEFINITION
Preferences may not always indicate welfare for the following
reasons:
1) Preference for a good may be based on wrong information. For
example due to wrong information a consumer may choose a good
which damages her health.
2) Preferences can be strongly influenced by advertisements.
Advertisements can make a consumer prefer goods which are
harmful.
3) Preference can be influenced by habit ( ) and custom (
). So a consumer may prefer x to y not because x improves her
welfare but because it is her habit to use x or because in her society
x is consumed by people traditionally.
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4) Adaptive preferences are a serious problem for preference
definition. Adaptive preferences refers to preferences which indicate
that a person is adjusting to her circumstances (
). For example a woman may prefer not to go for a job because in her
society women are discouraged from working out side the house. This
womens preference does not indicate her welfare but her
circumstances.
5) Sen says that people are motivated not only by self-interest but also
by the desire to help others. This is called altruism (
). So a person may prefer x to y because x will help others.
When there is altruism preference will not indicate welfare.
5) Sen says that a good definition of welfare should define welfare in
terms of an object which is the goal in itself. It should not be the
means to some other goal. Preference is not a goal by itself.
Preferences are a means for other goals. For example we prefer to
read a book for information. Information is the goal of our
preference for reading. The preference itself is not the final goal.
Therefore preference is not a good definition of welfare.
6) Sens paretian liberal theorem demonstrates that the pareto rule
can be in conflict with personal liberty. Sen argues that the way to
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avoid this problem is to go beyond individual preferences in
conceptualizing welfare, ( ).
_________________________________________________________
________________
UTILITY FUNCTION
A utility function indicates the preference ordering of an individual.
The term utility here does not mean happiness but preference (
).
For example, if for a consumer xPy and yPz, these preference
orderings are her utility function.
Properties of a utility function
The basic preference relationship between alternatives is the
relationship at least as good as
( ) denoted by R .
xRy means x is at least as good as y ( ). That
is, either x is preferred to y or the consumer is indifferent between x
and y.
A utility function will exist for an individual if the following properties
are satisfied:
1) Reflexivity : If x is an alternative then xRx
2) Transitivity: If xRy and yRz, then xRz
3) Completeness : Either xRy, or yRx, or both.
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If the above properties are satisfied, a consumer will have a utility
function.
_________________________________________________________
________________
PRIMARY GOODS DEFINITION OF WELFARE
The primary goods definition of welfare was given by John Rawls, an
American philosopher.
According to Rawls, the welfare of a person is indicated by primary
goods. Primary goods are defined as those goods which will be
demanded by all individuals. Music will not be preferred by all
people, books will not be preferred by all people, but every person will
demand the primary goods.
According to Rawls the following are the primary goods which will be
demanded by every individual:
1) Income and wealth
2) Social bases of self-respect ( )
3) Freedom
Rawls says that freedom is the most important primary good
because if they it is lost it cannot be easily recovered.
Using the primary goods definition of welfare, person A is said to be
better-off than person B if A has more quantity of primary goods
than B.
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Pa > Pb = Wa > Wb
Where: Pa is the quantity of primary goods with person A
Pb is the quantity of primary goods with person B
Wa is the welfare level of A
Wb is the welfare level of B
PROPERTIES OF PRIMARY GOODS DEFINITION
The following are the properties of the primary goods definition of
welfare:
1) Social contract formed behind veil of ignorance.
2) Ordinalism
3) Interpersonal comparisons of welfare levels
1) Social contract formed behind veil of ignorance: Rawls says
that a just society ( ) is a society the rules of
which will be decided through a social contract ( ).
It is assumed thatthe social contract is entered into by individuals when
they are behind the Veil of ignorance ( ). The
veil of ignorance refers to an imaginary situation where there is no legal
system and no economic system. The laws formulated in this imaginary
situation will be just laws because the people are not aware about their
own situation after a social and economic system is established.
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2) Ordinalism : the ordinal measure of welfare is used in Rawlss
theory.
3) Interpersonal comparisons of welfare levels: Rawlss theory of
welfare requires the use of interpersonal comparisons of welfare
because these comparisons are needed to identify the people with
lowest welfare. The interpersonal comparisons in this theory are made
by comparing the primary goods of different individuals. Level
comparability is used. That is, in making interpersonal comparisons
we can say that A is better-off than B because A has higher welfare
level.
THE RULES OF A JUST SOCIETY:
Rawls says that the following rules will be formulated by people
behind the veil of ignorance :
1) Every individual will enjoy maximum personal freedom without
affecting the freedom of other people.
2) Inequality in society can be accepted only if:
a) The inequality is due to positions which are occupied through
open competition. All people should have equal opportunity
to occupy these positions.
b) Inequality should benefit all people. Inequality is good only if
it gives incentive to people to work hard and increase
production.
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3) The society should use the difference principle: The difference
principle requires that economic policies should maximize the
welfare of the person who has the lowest level of welfare, that is
the person with the lowest amount of primary goods.
CRITICAL EVALUATION OF PRIMARY GOODS
DEFINITION:
MERITS OF PRIMARY GOODS DEFINITION:
1) Sen says that a good definition of welfare should describe the life
people are living. The primary goods are a better description
of the life of people compared to preferences or utility. For
example a primary good like income is a better indicator of the
life we can live compared to the level of happiness or the type of
preferences. Poverty is the major concern in poor countries.
Economists measure poverty by using either income or the
quantity of food intake. These two indicators are related to the
primary goods definition. Therefore to study poverty the primary
goods approach to welfare is more useful.
2) The primary goods definition uses interpersonal comparisons
and therefore the least well-off people in the society can be
identified.
3) The measurement of primary goods levels is easy compared to
measurement of utility.
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4) Rawlss theory of welfare recognizes the importance of
freedom. Freedom is neglected in the utility and preference
definitions. The importance of freedom is now recognized in
welfare economics.
LIMITATIONS OF PRIMARY GOODS DEFINITION:
1) Sen says that although primary goods are a better indicator of
the life of people than utility and preferences, goods do not
describe the life of people fully. Sen illustrates this point with
two examples. (1) Rice is a good, but the quantity of rice with a
person may not be sufficient to meet her food requirements. (2)
A bicycle is a good but the person owning one may be physically
challenged and cannot use it. Therefore the availability of
goods rice and a bicycle alone is not a good indicator about the
welfare of a person.
2) Primary goods provide welfare. Goods are a means to obtain
welfare but not the final goal (
). For example food can be used for obtaining good
health. But food itself is not a welfare object or the final goal of
people. Since goods are not themselves the goal, primary goods is
not a satisfactory definition of welfare according to Sen.
3) Interpersonally comparing primary goods can be misleading. A
person with lower amount of primary goods may have a
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better life than a person with higher quantity of goods. For
example: A person A may have more rice than B. But the
quantity of rice with A may not be sufficient to meet As
nutritional needs, while the lower amount of rice with B may be
sufficient for her needs.
THE CAPABILITY DEFINITION OF WELFARE
The capability definition of welfare was formulated by Amartya
Sen.
The capability approach to welfare defines welfare in terms of
the life people are living. Sen distinguishes two components of
welfare:
1) Functionings
2) Capabilities
1) Functionings: Functioningsrefer to the activities people are
able to perform (
). The ability to read and write is a
functioning. The ability to avoid disease like cholera is a
functioning. Functionings show the life people are leading.
The capabilities definition can be understood if it is compared with the
other definitions of welfare. This can be shown as follows:
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GOODS -------------- FUNCTIONINGS --------------
UTILITY
Rice --------------- Good health
Bicycle --------------- Movement
Rice is a good. It provides good health which is a functioning. Health
results in utility.
A bicycle is a good. It provides the ability to move around. This is a
functioning. The ability to move around provides utility.
Rawls is interested in the quantity of goods like rice and bicycles.
Utilitarians concentrate on the utility obtained.
Sen gives importance to the functionings resulting from these goods.
Having rice and a bicycle is not enough unless they can be used for various
functionings.
We can say that functionings provide Sens narrow definition of
welfare( ).
The broad definition is provided by capabilities.
2) Capabilities: Capabilitiesrefer to the freedom people have to choose
the kind of life they want to live (
).
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The difference between capabilities and functionings can be
explained by this example given by Sen: Two people, A and B,
did not have food last 24 hours. A has not eaten food because
she is fasting ( ). B has not eaten because she is
poor and cannot afford to purchase food. So A is going without
food voluntarily. It is herchoice to go without food If she
chooses, she can eat food (
). B is going without food involuntarily. B does
not have a choice.
The functionings of A and B is their life without food for 24
hours. The functionings are the same for A and B.
The capabilities of A and B are the freedom or choice they have
to eat food. A has the choice but B does not. So the capabilities
are different. A has more capabilities than B.
The welfare of a person can be defined as her capabilities to perform
various functionings.
This is the broad definition of welfare.
FREEDOM AND WELFARE:
Freedom is an important element in Sens theory of welfare. Freedom
can be divided into two types:
1) Negative freedom.
2) Positive freedom
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Negative freedom refers to freedom from intervention by others (
). For example, if a person has the money required to go to college,
negative freedom means no one should prevent her from going to a
college.
Positive freedom refers to the freedom to perform some activity (
), for example the freedom to get education. There is positive freedom if
those who want to go to college are able to go to college even if they do
not have the money.
Negative freedom assumes that a person has the ability to perform
some activity (like getting education). No one should prevent the person
from using her ability. If the ability is not there, the person need not be
helped.
Positive freedom means that if the ability is not there the person should be
helped to obtain the ability.
The capability definition of welfare is based on the idea of positive
freedom. Sen says that all people should have the freedom to perform the
basic functionings such as going to school or getting medical treatment.
Sen identifies the following as the basic capabilities:
1) The capability to be literate.
2) The capability to lead a long and healthy life.
3) The capability to earn income to have access to important resources.
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The above are the basic choices because unless a person has the
freedom to choose to be literate, lead a long and healthy life, and
have access to important resources she cannot make any other
choices.
Sen says that every person has the right to these basic capabilities. If the
free-market cannot provide them, the state should provide them.
PROPERTIES OF CAPABILITY DEFINITION:
1) Human beings are treated as ends in themselves and not as means
to an end (
). Capabilities should be increased
because they are required for a good life and not for increasing labour
productivity or GNP.
2) Non-utility information is used in the capability definition. Non-
utility information refers to information about freedom, health of
individuals, distribution of income etc. The assumption of
neutrality is rejected ( Neutrality means that only preferences or
satisfaction levels should be taken into account).
3) The identity of individuals is taken into account (
). For example assume that a policy affects two people A and B. The
policy makes A better-off ( ) and B worse-off (
). It is important to find out whether A is rich or poor, man or
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woman etc. Anonymity is rejected ( Anonymity means that
individual identity is not important).
4) Interpersonal comparisons of welfare are used. Sen says that
without interpersonal comparisons it is not possible to study
important things like inequality and poverty.
EVALUATION OF CAPABILITY DEFINITION:
MERITS OF CAPABILITY DEFINITION:
1) The capability definition satisfies the two criteria of a good
definition of welfare:
a) It is concerned with the life people are living.
b) It defines welfare in terms of objects which are important
goals in themselves. Capability is a goal in itself (
).
2) It uses all the required information for studying welfare:
a) It uses cardinal utility as well as interpersonal comparisons of
utility.
b) It makes use of non-utility information.
c) It takes into account how different categories of people ( rich
and poor; men and women etc) are affected by policies.
3) It is easy to get information on the basic capabilities.
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4) The capability definition of welfare has been found useful in several
ways:
a) The capability approach has been used to formulate a
development indicator called the human development index
(HDI) as an alternative to the GNP.
b)It has been used to study thewelfare status of women. The
capability approach can be used to study how economic and non-economic
factors such as religion affect womens welfare.
c)It provides a basis forstudy of poverty and inequality.
LIMITATIONS OF THE CAPABILITY DEFINITION
1) The capability definition is a vague definition (
). It is not as precise as the preference or utility definitions. But Sen
says that it is better to be vaguely right than to be precisely wrong
2) It neglects the importance of investment in human capital for
increasing productivity and growth. For example, Sen says that
education is an important goal itself. He ignores the contribution of
education to labour productivity. According to Partha Dasgupta if the
returns from this is not taken into account, poor countries may not
invest enough in education.
3) The definition concentrates on the need to expand human
capabilities ignoring the importance of economic growth. Without
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economic growth the resources for providing basic capabilities will
not be available.